Aberdeen Standard’s smaller companies investment team believe the UK faces an imminent jobs crisis when the furlough scheme ends next month.
The government’s insistence that the already extended employee support mechanism must end on 31 October will expose many workers to redundancy, say the fund managers.
On top of that, the efficiency gains many businesses have made accelerating the ‘digitisation’ of their operations during the Covid-19 pandemic has shored up a further wave of job cuts. This is a factor that Abby Glennie, deputy head of the team, and fund manager Amanda Yeaman say remains overlooked, although it will bring benefits to investors.
The fund managers, who work across the £127m ASI UK Mid-Cap Equity fund and £59m Aberdeen Smaller Companies Income (ASCI) investment trust, as well as on Citywire AAA-rated Harry Nimmo’s funds and trust, outlined a bleak picture for the UK’s workers and economy this autumn. They revealed that even the strongly-performing companies they talk to could be ready to cut up to 5% of their workforces.
The businesses they speak to are trying ‘to smooth out their headcounts’, by retraining workers in areas that are performing more strongly, reducing hours or rolling back incentives, according to Yeaman. However, the government’s ‘flip-flopping’ over coronavirus restrictions and the operation of the economy has not helped.
‘They’re doing everything they can at the moment without the certainty that they need to make a decision, to try to keep these people employed,’ said the managers.
‘Companies are on a real knife edge as to whether to keep those people on in a function that may not be there in two months’ time.’
Furlough lifeline pulled
Citywire A-rated Glennie, also lead manager of the £137m ASI UK Opportunities fund, said there had been a strong element of the furlough scheme holding up the ‘inevitable’.
‘I think there are lots of decisions that companies already have made and whether employees have been told or not, I’m not quite sure. But companies know that actually they’re not going to take back these people,’ she said.
The government has remained resolute that the already-extended Coronavirus Job Retention Scheme, or furloughing, will end on 31 October. From the beginning of this month, the government moved to pay 70% of employees’ wages, with employers having to top up the remaining 10%.
Boris Johnson (pictured) ruled out the idea of an extension again yesterday, even as the UK looks to be entering a second wave of the virus, with new infections growing at the same rate as in early April.
Drastic job cuts in the worst-hit sectors like hospitality, travel and retail – such as the 2,800 jobs lost at London-centric chain Pret a Manager in late August, shortly after 7,000 at Marks & Spencer (MKS) – are expected to continue.
However, the ASI team believe that one-off blow will be accompanied by a wider creep of job losses across the economy.
‘Two sides’ to job losses
‘There’s two sides to the step-up in unemployment that we’re thinking about. Which is one, when furlough ends, you’re absolutely going to get a step-up then. But then the other part is just that operational efficiency,’ said Glennie (pictured).
The manager said trends like digitisation and automation had leapt forward by years and now topped almost every chief executive’s agenda.
Most companies they invest in now think they could cut 5%, or in some cases a tenth, of workers without impacting capacity.
‘That is digitisation and I think also things come to light when you get thrown into a different situation. You have to think about operating differently,’ said Glennie.
The managers emphasised that 5% was an ‘across-the-board’ figure and that the team’s focus on companies with strong balance sheets meant this was firms that had been relatively resilient during the crisis. For struggling firms, the toll could be much greater.
While younger and low-paid workers had gone first in virus-hit sectors, they said potential cuts to middle managers cropped up constantly in discussions with companies. The advent of mass working from home in the services sector could also lead to job losses in the UK.
‘There’s a lot of “Be careful what you wish for”, in terms of working from home. Because if you can work at home, you could work at home in India at 40% of the cost,’ Yeaman said.
More Main Street than Wall Street
The managers said it was hard to assess just how bad the effect on the UK economy would be, but a huge impact on unemployment and consumer spending was certain. There was no doubt that compared to the fallout from the 2008 financial crisis, the hit is set to be ‘more Main Street than Wall Street’, they said.
‘The first signs that we should be looking at on the consumer side of things, because furlough has artificially rescued [that] at the moment,’ said Glennie.
‘Spending has been inflated in some areas actually, through lockdown, because it just got shifted from travel and leisure, let’s say, to online retail.’
The managers were also critical of the idea of raising corporation tax, which could spur further job losses as firms had to offset that in some way. The chancellor, Rishi Sunak, is said to be considering the move in the autumn budget as one way to plug to hole in the public finances.
A survey for accountants BDO this week found 60% of medium-sized firms plan to make redundancies once the furlough scheme ends. Nearly all the firms polled had already made redundancies while less than 10% had no further plans for job cuts.